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IPFS News Link • Currencies

Bitcoin, The Chinese, & The Dollar

• by Martin Enlund

Investor and entrepreneur Peter Thiel recently wondered if not "Bitcoin should … be thought [of] in part as a Chinese financial weapon against the US".

To try to explain what this could mean, we turn to recent economic research on fiscal and monetary capacity.

Fiscal capacity refers to a state's administrative and political ability to tax its population, and monetary capacity refers to the degree to which the state can get its citizens (and others) to hold the state's currency – in Thiel's case the world's most important reserve currency – the dollar. In 2020, Bonfatti, Brzeninski, Karaman and Palma suggested in their article Monetary capacity a model in which fiscal and monetary capacity go hand in hand.

Public demand for dollars depends on inflation ­expectations (you do not want to hold zero-return notes when inflation is high). Low inflation expectations thus improve monetary capacity as more economic agents will want to keep a currency which is expected to maintain its (real) value.